GrandSouth Bancorporation Reports Earnings for the Second Quarter of 2017and Declares Dividends

Friday, September 8th, 2017

GrandSouth Bancorporation had another excellent quarter of growth in total assets ending June 30, 2017. Our investment into three new markets combined with organic growth in our legacy offices produced asset growth of approximately 31.6% year over year. Total assets grew from $459.0 million as of June 30, 2016 to $603.9 million as of June 30, 2017. For the quarter, total assets grew approximately $44.5 million or 8.0% from March 31, 2017. In addition, we expanded our footprint down to the coast by adding two experienced bankers in the Charleston Market. Rob Phillips, Senior Vice President/Market President, and Alan Uram, Senior Vice President/Commercial Banker, both longtime Charleston bankers, joined our team in May. Rob has 37 years of banking experience and comes to us from NBSC where he served as the Coastal Area Executive. He has worked in the Charleston market for 25 years and his previous territory covered the entire coast from Hilton Head to Myrtle Beach. Alan also comes to us from NBSC where he previously served as the Charleston Market President and has worked in Charleston for the last 15 years. We are very optimistic about our entrance into one of South Carolina's fastest growing cities and the value Rob and others bring to our franchise.

The Bank is having excellent asset, loan, and deposit growth. The reasons for these extraordinary growth numbers are as follows: 1). We have intentionally recruited and retained very experienced bankers. They are accustomed to producing at high levels, servicing large portfolios, and are well connected in the markets they serve. 2). The US economy continues to look healthy with low unemployment and strong consumer confidence. The Federal Reserve did raise the federal funds rate 25 basis points to 1.25% (up 75 basis points from a year ago). This has pushed short term rates up but long-term rates have declined. The South Carolina economy is expected to outpace the national numbers and is supported by continued growth in the upstate and the tri-county area of Charleston, Berkeley, and Dorchester. We are continuing to have good reports from our clients across the state especially those in the construction industry. We are hopeful that South Carolina farmers are poised to have a better year in 2017 than in the previous two years. Commodity prices on corn and soybeans have slowly declined since the beginning of 2017 and are approximately $3.40 and $9.40 per bushel respectively. Peanut contracts were higher than the past two years with prices varying from $500 to $525 per ton. Cotton prices have remained in the $.70 cents per pound range all year. The corn harvest is winding down across the state and most farmers are seeing outstanding yields. Current crop conditions for soybeans, cotton, and peanuts are above average to excellent.

Total loans grew from $418.8 million as of December 31, 2016 to $473.3 million as of June 30, 2017. This $54.5 million increase represents 13.0% growth in 6 months. The majority of this growth came from our Greenville, Columbia, and Orangeburg markets.

Total deposits have grown by $45.8 million from the previous quarter, or 9.7%, and are up 38.3% from the previous year. As of June 30, 2017, deposits totaled $518.9 million. We are pleased to report our wholesale funding continues to decline and is down 18.4% since June 30, 2016. Most importantly, our demand deposits continue a nice trend of growth and are up 17.4% from a year prior. Our Columbia and Orangeburg markets have been big contributors to this overall deposit growth. Columbia ended the quarter with total deposits of $36.8 million and had a 31.1% increase from the prior quarter. Orangeburg ended the quarter at $43.8 million in deposits and had a 48.4% increase from the previous quarter.

As we anticipated, our specialty floor plan lending division results were much improved compared to first quarter 2017 results. We made changes in our underwriting and operating procedures in the second quarter of 2017 to improve the credit quality of the portfolio. As a result, there were charge offs of $751 thousand for the second quarter of 2017, equating to an annualized loss rate of 3.78%, compared to $1.6 million in first quarter of 2017. We continue to maintain elevated loss expectations within the allowance for loan losses due to the loss history throughout the entirety of 2017. While this second quarter loss rate is still above the loss rate we would like to see in this division, it is within a range that allows the division to be a positive contributor to the results of the company.

We continue to monitor the used car industry trends that affect our floor planning business. Automobile sales for 2017 have declined year over year and this is a trend that we are watching closely. This negative trend has not caused used car values to decline appreciably for the year. In fact, values rebounded in the second quarter and are above year end values according to the leading used car valuation index. Nonetheless, we stand prepared to make additional changes, as necessary to mitigate future losses.

The investments we made in the last two years for the future success of our company are beginning to yield results. We expect these results will continue to improve as we grow into our new markets and continue to expand our franchise. We have high expectations for the Charleston market and the early results are very positive.

As you will also note in the following financial information, our earnings for the three months ended June 30, 2017 have improved substantially from the first quarter of 2017. While these results are not at the level of the prior year, we are confident that the fruits of our efforts to grow your company will continue to add earnings in future periods. We appreciate the support from our shareholders and customers and look forward to continued success in 2017.

Sincerely,

JB Schwiers President & CEO

GrandSouth Bancorporation, the holding company for GrandSouth Bank, announced that net income for the quarter ended June 30, 2017 was $468 thousand compared to $1.1 million during the quarter ended June 30, 2016.

The Board of Directors declared a dividend of $0.10 per common share ($0.105 per Series A preferred share) payable on September 8, 2017 to shareholders of record on August 31, 2017. This is our sixteenth consecutive quarterly dividend.

Overview

Net loans increased by $21.97 million, or 4.94%, during the quarter.

GrandSouth Bancorporation's efficiency ratio was 76.57% during the second quarter of 2017 compared to 65.44% during the second quarter of 2016.

GrandSouth Bancorporation's return on average assets was 0.33% during the second quarter of 2017 compared to 1.06% in the same quarter last year.

The return on average equity was 3.68% in the second quarter of 2017, down from 8.88% in the second quarter of 2016.

Net Interest Income During the second quarter of 2017, net interest income before the provision for loan losses was $7.7 million, up from $6.5 million during the second quarter of 2016. Average loans during the second quarter of 2017 were $464.2 million compared to $356.5 million during the same period last year. The net interest margin was 5.89% in the second quarter of 2017, down from 6.35% in the second quarter of 2016 and down from 6.82% in the prior quarter.

Noninterest income Noninterest income was $284 thousand during the second quarter of 2017, compared to $249 thousand during the same quarter of 2016.

Noninterest Expense Noninterest expense was $6.1 million for the second quarter of 2017 compared to $4.4 million for the second quarter of 2016. Growth in non-interest expense during the quarter was impacted by the Company's in-process expansion of three new offices in the Columbia, Orangeburg, and Charleston, S.C. markets. Employee compensation increased by $863 thousand compared to the second quarter of 2016.

The efficiency ratio increased to 76.57% during the quarter ended June 30, 2017 from 65.44% during the second quarter of 2016.

Loan Portfolio Net loan growth in the second quarter of 2017 was $21.97 million.

The composition of our loan portfolio consisted of the following at June 30, 2017 and December 31, 2016:

June 30,

December 31,

2017

2016

(Dollars in thousands)

Loans secured by real estate:

Commercial, financial, and agricultural

$ 144,673

$ 130,577

Real estate - construction, land development, and other

land loans

37,208

38,371

Real estate – mortgage

237,956

214,679

Installment loans to individuals

53,428

35,164

Loans, gross

473,265

418,791

Allowance for possible loan losses

(6,396)

(5,158)

Loans, net

$ 466,869

$ 413,633

Loan Loss Provision/Asset QualityThe loan loss provision for the quarter ended June 30, 2017 was $1.1 million, compared to $495 thousand for the same period last year. Net charge offs for the three months ended June 30, 2017 were $782 thousand, compared to $467 thousand for the same period in 2016.

Other Real Estate Owned as of June 30, 2017 was $5.6 million compared to $4.9 million as of the end of the previous year. Nonaccrual loans remained the same at $2.9 million at June 30, 2017 as compared to the end of last year.

GrandSouth Bancorporation's allowance for loan losses as a percentage of total loans at June 30, 2017 was 1.35%, compared to 1.23% at the end of 2016. Management believes the allowance is adequate at this time but continues to monitor trends in environmental factors which may potentially affect future losses.

Securities PortfolioInvestment securities, all of which are available-for-sale, were $24.0 million at June 30, 2017 down from $25.5 million at December 31, 2016.

Securities in our investment portfolio as of June 30, 2017 were as follows:

callable agency securities in the amount of $5.9 million

residential government-sponsored mortgage-backed securities in the amount of $14.0 million

taxable municipal bonds in the amount of $1.0 million

nontaxable municipal bonds in the amount of $3.1 million

During the second quarter of 2017, two municipal securities in the amount of $731 thousand and one agency security in the amount of $1.0 million were called. Two mortgage backed securities in the amount of $2.8 million were purchased.

Deposits Total deposits were $518.9 million at June 30, 2017 compared to $430.3 million at December 31, 2016. Interest-bearing accounts were $441.9 million at June 30, 2017 up from $360.4 million at December 31, 2016.

Shareholders' Equity Total shareholders' equity held steady at $50.7 million from December 31, 2016 to June 30, 2017, the activity of which resulted from the retention of earnings, payment of dividends, exercise of stock options, expense of stock option grants, and changes in the fair market value of investments. Our Tier 1 Risk Based Capital Ratios were 12.43% and 12.22% for GrandSouth Bancorporation and GrandSouth Bank, respectively, as of June 30, 2017.

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